I am getting a lot of mixed messages about how to account for stock dividends. I understand it is like a phantom dividend because the the company does not actually put out the capital to cover the new shares. (the actual cash value is courteous of who ever the stock dividend reciever sells their shares to) Other than increasing shares outstanding, in what way is this action reported on the balance sheet? Is it reported any different from a reverse stock split? I’ve even seen some confusing layouts where the accounting of the stock dividend is different based on whether the payout was greater than or less than a 20% share increase.
I hope someone can spell it all out in one statement because I have gathered information from too many different sources and it is not all making sense.
There are two ways of dividend payout. One in cash and another in stock dividend.
Due to double entry accounting approach, cash payout decrease Company’s assets (cash position) and decrease Stockholders equity poistion (retained earnings or earnings of current year) in same amount.
Stock dividends accounting may be quite difficult to understand. Here there is change only on Company’s equity poistion. First record is decreasing of retained or current earnings as stated in point one, another (since there is no cash payout) increasing contributed capital since we have new stock emission.
Cash payout is stated in CF statement. Stock dividend is not recorded in CFS since there is no cash flow, it is stated in Statement of changes in Equity.
ok, I think I understand…still a little confused
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stock dividend issued. value of common shares in shareholders equity increases by (new shares issued x par value
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since shareholder equity has increased though common shares value by the amount of (new shares issued x par value), the added value must be balanced.
…so what is happening with retaind earnings and contributed capital? retained earning are decreased and contributed capital is increased?.. but those two actions equalize each other. There would still be an increase to common shares value that is not being balanced, right?
I was looking at some actual balance sheets. Is “paid-in capital” the same as contributed capital?
(I apologize for any obvious naivete. I am literally teaching myself accounting from square one.)
There would still be increase to common shares value that is not being balanced only in case of stock emission above par value. In this case we have difference booked (shown) in position other capital reserve. This is also part of capital position. If we have situation of emission above par this capital position would be increased for difference above par. If stock emission was below par, this capital reserve account would decrease for this difference. In some countries stock emission below par is not permitted.
Maybe in the U.S. this capital reserve account name is " Additonal Paid-In Capital". What else, this is capital surplus account.